High gasoline prices will make research into such [energy] alternatives more urgent, [Energy Secretary] Chu said.
“But is the overall goal to get our price” of gasoline down, asked [Rep.] Nunnelee.
“No, the overall goal is to decrease our dependency on oil, to build and strengthen our economy,” Chu replied. “We think that if you consider all these energy policies, including energy efficiency, we think that we can go a long way to becoming less dependent on oil and [diversifying] our supply and we’ll help the American economy and the American consumers.”

In short, in Michigan, Romney carried conservatives, Republicans, Catholics, those who believe working in business is better prep for the presidency than working in government, and those who are most dedicated to voting against President Obama.

When you have a candidate few people really like, whose support is a mile wide and an inch deep, whose raison d’etre (a 4am fancy word) is fixing an economy that is fixing itself without him, and who only wins his actual, factual home state by three percentage points against a guy no one took seriously only two months ago, there really is little reason for independent voters in the general election to choose him if the economy keeps improving.
Seriously, putting it bluntly, conservatives may not like Barack Obama, but most other people do. And when faced with a guy you like and a guy you don’t like who says he can fix an economy that no longer needs fixing, you’re going to go with the guy you like.

I guess a shrinking labor market is a sign of economic improvement, then! Is this going to be the new anti-Romney line of attack: Just like the White House says, the economy is totally turned around, thanks to Barack Obama? It wouldn't be the first time anti-Romney voices have mimicked Democratic talking points.

1) A win is a win
It’s the cliche of the cycle, and we’ve found ourselves saying it to defend a Mitt Romney victory more frequently than we’d have ever imagined.
It wasn’t pretty, and he carried Michigan by a smaller margin than in 2008, but the bottom line is that Romney was in a major political fight Tuesday — and he won. He also scored a blowout victory in Arizona. If he had lost Michigan, it’s hard to gauge the level of panic that would have unfolded within GOP ranks.

The trouble is that the primary process has made, is making, and will continue to make The Next Guy in Line a weaker rather than a stronger candidate in the general contest come November.

Romney emerges from Michigan committed not only to the Ryan plan, but also to a 20% cut in tax rates, above and beyond his prior commitment to making the Bush tax cuts permanent. He emerges as the candidate who has endorsed the idea that President Obama is waging war on religion as never before seen in this country, not even when the prophet of Romney's faith was murdered and his own family driven into exile. He emerges above all as a candidate who has distanced himself from his own most signal achievement in government, his Massachusetts healthcare plan, and identified himself with America's financial elite in almost every regard.

That's not the race I'm sure Romney intended to run. But it will be hard to change now.

The Teacher Data Reports were compiled for three school years between 2007 and 2010, and were never meant to be made public, although the DOE used them as a tool to make tenure decisions. The data are supposed to reflect a teacher’s ability to affect fourth through eighth grade students’ progress on standardized tests. But the UFT argues the scores are misleading and based on questionable data. The average margin of error for English teachers is 53 percent, and 35 percent for math. That means a teacher with a score of 50 percent may really have scored anywhere from a 23 percent to a 77 percent. The breakdown compares teachers based on their amount of experience and takes into account gender, ethnicity, socioeconomic status - among other things - to try to show how teachers in similar situations are helping students improve.

These huge margins of error would seem to be a big problem for assessing a teacher's competence---assuming that you believe that standardized testing performance is a good vehicle for this assessment (a questionable assumption at best).

Wednesday, February 22, 2012

In 2010, John F. Cogan, R. Glenn Hubbard, and Daniel P. Kessler published in Forum for Health Economics & Policy a report (“The Effect of Massachusetts’ Health Reform on Employer-Sponsored Insurance Premiums”) on the effects of Governor Mitt Romney's 2006 health-care reform in Massachusetts. This report suggested that, up until 2008, these reforms (hereafter referred to as "Romneycare") led to a relative increase in health-insurance premiums. This report was cited numerous times by opponents of Romney and helped fuel the belief that Romneycare caused health-insurance premiums to skyrocket in Massachusetts (even though Cogan et al. did not make this claim).

However, new data has now come out (covering through 2010), and this data tells a rather different story. It instead suggests that Massachusetts's health-insurance premium growth declined relative to the nation as a whole in the years since Romneycare has been enacted. From 2006 to 2010, employer-sponsored health-care premiums for a family rose about 19% in Massachusetts, while they rose about 22% in the US as a whole. Compare that to the period between 2002 and 2006, when Bay State family premiums increased 40% and US family premiums rose only 34.5%. Family premiums have seen the greatest reduction in growth since Romneycare; individual premiums have also slowed their rate of growth, though by not as much. For both family and individual premiums, the rate of growth fell below the national average in the period between 2008 and 2010.

The analysis below will look at the growth of employer-sponsored health-insurance premiums for families and for individuals prior to 2006 and after 2006. It will also look at the difference in growth rates for health-insurance premiums for businesses in the small group market (those with under 50 employees) and with businesses with more than 50 employees. The numbers shown are average premiums for families and individuals. I use the same source as the Cogan study mentioned above, the federally sponsored Medical Expenditure Panel Survey. (I also borrow some of my methodology from the Cogan study as well.)

Looking at employer-sponsored health-insurance premiums is a helpful lens for looking at the effects of Romneycare on the insurance market. According to the Bureau of Labor Statistics and the Census Bureau, 69% of Massachusetts residents under 65 were covered by employment-based health insurance in 2010. Nationally, a little over 58% of US residents under 65 were covered by employment-based insurance. So a significant portion of the Massachusetts insurance market is connected to employment.

I. Family Premiums v. Individual Premiums in Massachusetts

The following tables show the percentage growth in average family and individual premiums for the United States as a whole and Massachusetts during two periods: 2006 to 2010 (the four years after Romneycare) and 2002 to 2006 (the four years before it). Looking at the years prior to Romneycare's passage will give some sense of the overall growth rate of Massachusetts premiums before reform was enacted. Situating Massachusetts's growth numbers in the greater context of time and national trends will help evaluate the arc of the state's premium growth after Romneycare. For each period, I give the raw difference in percentage growth between Massachusetts premiums and those of the nation as a whole. A positive difference means that Massachusetts premiums are growing more quickly than those of the nation as a whole; a negative difference means that they are growing more slowly.

These charts also provide a raw differential for the differences between those two periods (arrived at by subtracting the 2010-2006 difference from the 2006-2002 difference). Under the circumstances explored in the present analysis, a positive differential suggests that Massachusetts premiums after the passage of Romneycare curved even more upwards relative to the nation as a whole; a negative differential suggests that, after the Massachusetts health-care reform, the rate of premium growth slowed relative to the nation as a whole.

Looking at the raw differences and differentials does not entirely reveal the precise magnitude of the change in premium increases for Massachusetts, so here's another chart showing the percentage premium increase in Massachusetts as a percentage of the US percentage premium increase. The US percentage increase is equal to 100%. So, for the 2002-2006 period, family premiums in Massachusetts grew 40%, while they grew 34.5% in the US; this would be represented as 116% in the chart below, as 40% is 116% of 34.5%.

C. Premium growth compared to US Growth (US Growth =100%)

2002-2006

2006-10

MA Family Premiums

116.0%

85.8%

Ma Individual Premium

112.1%

108.7%

This data suggests that family plans in the Bay State have witnessed the largest decline in growth. Situating Massachusetts within a broader, state-to-state context makes this decline in premium growth even more striking. By 2010, Massachusetts had the third-lowest average family premiums in New England (Vermont had the lowest, and Maine's family premium was $30 less than Massachusetts's) and had lower average family premiums than a number of other states in other regions, including New York, Illinois, Delaware, and Florida. Often held up as an example of a successful "red state" model on health-care as well as other issues, Texas has been less successful at slowing the growth of premiums than Massachusetts. The gap between these two states has shrunk since Romneycare has been enacted. The average family premium in Massachusetts was about $600 more than the average family premium in Texas in 2006 ($12,290 vs. $11,690). In 2010, the difference between average family premiums had declined to less than $100 ($14,606 vs. $14,526).

Health-insurance premium growth did not slow as much for individuals as it did for family plans. However, it still did slow in absolute terms and relative to the nation as a whole. By the the 2008-2010 period, the individual premium in Massachusetts grew about 5% slower than it did for the US (Bay State premiums grew 11.9% while US premiums grew 12.6%), so the gap between the two premium growth rates did narrow over the period.

It is also perhaps worth comparing not the magnitude of health-insurance premium growth but the size of premiums themselves for the US and Massachusetts. Below are two charts comparing US and Massachusetts average premiums for family and individual employer-sponsored health insurance plans. Listed is the average Massachusetts premium, the average US premium, and the Massachusetts premium as a percentage of the US premium (a percentage over 100% means that the Massachusetts premium is larger than the US premium).

In 2010, the average family premium in Massachusetts was closer to the national average after the passage of Romneycare than it was the year Romneycare was enacted. Indeed, the average family premium actually declined in Massachusetts from 2009 to 2010. The average individual premium grew a little bit relative to the nation as a whole from 2006 to 2010. However, this premium had been relatively even larger in the past (in 2004, for example). It will be interesting to see whether 2011 continued the downward trajectory in individual premium growth hinted at in 2010.

II. The Effects of Reform on Premiums for Small and Big Businesses in Massachusetts

The effects of Romney's reforms on small businesses remain a topic of considerable concern. In order to explore these effects, I have taken a look at the rates of premium growth for companies with fewer than 50 employees (the small group market) and for companies with more than 50 employees. The tables below, organized according to principles similar to those of the first two tables of this article, compare the growth rates for average health insurance premiums for small and big businesses in Massachusetts and the US.

There is an interesting difference in the growth rates of individual and family premiums for businesses with fewer than 50 employees and for those with more than 50 employees. For businesses with fewer than 50 employees, family premiums have increased at a faster rate relative to the nation as a whole since the passage of Romneycare, but single premiums have increased at a slower rate relative to the national average. Something like the converse occurs for businesses with more than 50 employees: family premium growth has declined relative to the nation as a whole, and single rate increases have correspondingly slowed compared to the nation as a whole but not as much as small-business single employee rates did. These numbers complicate any attempt to weigh the effects of Romneycare on small businesses insurance premiums.

III. 2010 Rate Dispute: Potential Implications
There is a potential fly in the ointment of this analysis: in April 2010, the state insurance commissioner vetoed numerous rate increases for the small-group market proposed by a number of major Massachusetts health-insurance plans. At first, the insurance companies sued to overrule this action. Then various insurers settled with the Commonwealth to put some rate increases in place. This legal difficulty does not, however, seem to fully explain why the average family premium actually declined in 2010; since rate hikes were approved, the average premium could easily have risen.

Furthermore, the family small group market witnessed some of the biggest rate increases in the years 2006-2010, so a decline in average premium growth was due to declining growth for premiums for larger employers (i.e., those employers mostly immune to the commissioner's ruling), which suggests that we should not overestimate the effects of this ruling on health-care premiums. Between 2006 and 2010, the family premium for small group employers in Massachusetts increased faster than it did for the nation as a whole, rising 23.2% while US premiums grew 18.7%. For employers with over 50 workers, health insurance premiums for a family plan grew slower than they did for US, increasing 17.8% while the national average climbed 22.4%. Furthermore small group family rates grew 6.5% in 2010 even as larger employer rates shrunk 2.6%. This dispute may have had some effect on the rate of insurance premiums growth, but it should not be overestimated.

Moreover, many health-insurance groups posted considerable surpluses in Massachusetts in 2010 (Massachusetts health insurance is dominated by non-profits, so "surpluses" are often used instead of "profits"). Three of the four biggest health insurers in Massachusetts (Harvard Pilgrim, Blue Cross/Blue Shield, and Tufts) had surpluses in 2010. The major Massachusetts-based insurer which lost money (Fallon Community Health Plan) had a smaller loss in 2010 than it did in 2009; in fact, 2009 was a worse year for Massachusetts insurer finances than 2010 was. So it is hard to say that the rate dispute pushed these plans to the brink of bankruptcy. For at least the first half of 2011, health insurance companies in Massachusetts were also posting big surpluses, in part because of slowing health-care costs.

IV. Conclusions and Comments
Obviously, the picture painted by this data is partial. Health-care costs paid by the consumer are not limited to health insurance premiums. However, it is perhaps worth noting that, in 2010, various other medical fees in Massachusetts (such as copays for visits to the doctor, deductibles, and coinsurance rates payable by consumers) were lower in Massachusetts than in the nation as a whole. Moreover, it would also be worthwhile to compare the per capita GDP of Massachusetts residents to health-insurance premiums. The Bay State has a relatively high per capita GDP, so it would be interesting to explore the change in premiums as a percentage of personal income over time. Taking into account these details may find a further reduction in health-care cost growth in Massachusetts compared to the US. As an additional point, looking at average premiums does not tell the whole story of premium growth in a state: looking at the growth of premiums at the low, middle, and high ends of health insurance plans would further reveal some of the implications of Romneycare for health insurance premiums.

This study is more an exercise in correlation rather than causation: it has not conclusively proved that Romneycare caused health-care premiums to slow their rate of growth in Massachusetts. But it does trouble the common claim that Romneycare uniquely caused premiums to skyrocket in Massachusetts. Instead, the four-year period after the passage of Romneycare witnessed slower growth than the four-year period before it---both in absolute terms and compared to the nation as a whole. In the period after 2006, premium growth for families fell below the growth rate for the national average, and the growth rate for individual premiums grew closer to the national average's growth rate. By the 2008-2010 period, both growth rates fell below the national average. This trend may not continue, but that is the current trend.

One of the premises of Romneycare was that universal insurance through government mandates and insurance subsidies to the poor would lead to slower growth rates in medical spending and insurance premiums. The spending growth rate on medical care seems to have declined in Massachusetts, and premium growth has either stayed the same or fallen relative to the national average. These trends alone do not make Romneycare a success, but they also suggest that health-insurance premium increases may not be a sufficient cause for declaring it a failure.

Thursday, February 16, 2012

As Mitt Romney struggles in the polls against his Republican rivals (particularly Rick Santorum) for the GOP nomination, it may be time for him to focus more on industrial policy. Romney has obviously done a lot of thinking on manufacturing policy, so he perhaps should put that thinking to use. Romney's recent op-ed in the Wall Street Journal, which slams the People's Republic of China for its distortion of the market, suggests that he may be moving in that direction.

Attending to industrial policy could be one way of helping Romney change the public perception that he represents the interests of the top 1%. According to recent polls, many voters think that Romney's policies would benefit the rich more than those of any other GOP presidential candidate; even 50% of Tea Partiers think that he favors the rich over the poor and middle class. There's something ironic about this perception, since many on the ideological, "purist" right have hammered Romney's policies as being too sympathetic to the middle class. But politics is filled with ironies; it's the job of a candidate to address those ironies and change the narrative. Focusing on restoring the health of the industrial middle class may be one avenue for narrative change.

A defense of manufacturing policy could also pay electoral dividends in Rust Belt states like Michigan and Ohio, where Santorum (who is also trying to stake out territory in manufacturing policy) is running neck-and-neck with---if not outpacing---Romney. These areas saw manufacturing as a source of wealth, and declines in manufacturing have hit many of these state economies hard.

Say Romney were to run an ad like this:

[Open on Romney in an abandoned, mostly empty warehouse that used to be a factory]

Romney: In 1998, this factory in -------, Michigan provided nearly a thousand middle-class jobs. A few years later, it was closed down, and a new factory opened up in China. This story has been repeated in small towns and cities across America for years, and, though it may complain, Washington has chosen not to deal with this issue in a serious way. Middle America has paid the price for Washington's negligence.

Well, it's time to change that. Americans are a hard-working people, and, given a level playing field, we can succeed at almost any task. But the playing field is not level. When countries manipulate their currencies, violate intellectual property rights, give illegal subsidies to native industries, and raise unfair barriers to US products, the American worker suffers. As president, I will take steps to correct these trade imbalances, even if I have to step on some toes to do it. I support the free market, but a lot of the stuff we're seeing is not part of the free market.

When I'm president, I'll work to ensure that this [gesturing to empty building] is not America's future. Working together, we can turn this country around and safeguard for future generations the legacy of economic opportunity passed down to us.

Unlike complaining about, say, Santorum voting to increase the debt ceiling, an ad like this would focus on an affirmative case for Romney. It would help shift the broader political debate from being a process-oriented one (who's up today? will negative attacks backfire?) to a substance-oriented one.

A mastery of policy details is one of Romney's strengths. To reinvigorate his campaign, he needs to enunciate and defend a distinctive policy vision.

Tuesday, February 14, 2012

A new CBS poll adds to the chorus of polls suggesting that the fierce GOP primary is, for the moment at least, taking its toll on all GOP candidates. This poll shows the following:

The new survey shows the president leading Romney by six points, 48 percent to 42 percent, among registered voters. Last month, the two men were tied at 45 percent each.
Mr. Obama's lead over former Pennsylvania Sen. Rick Santorum, who has surged to a lead in national polls, is eight points: 49 percent to 41 percent.
Romney's drop in support against the president is attributable to a shift among independents. Last month, independents favored the former Massachusetts governor by eight points over Mr. Obama. In the new survey, Mr. Obama holds the edge, leading Romney among independents by nine points.
The president holds double-digit leads over the other two GOP candidates in the race, Rep. Ron Paul and former House Speaker Newt Gingrich. Mr. Obama leads Paul 50 percent to 39 percent - an 11 point margin - and he leads Gingrich 54 percent to 36 percent, a difference of 18 points.

Romney's electability argument has perhaps been dinged a little---not because other candidates are rising in the polls vs. Obama but because Romney has sunk (though he still outperforms other GOP candidates by a couple points or so, according to most polls). Some of this decline is due no doubt to the nastiness of the primary raising the negatives of all candidates, particularly alienating independents. Perhaps, when the primary season ends, and the race moves on to the general election, some of those negative associations will fade into the background.

Still, it's worth noting that, in the middle of February 2008, amidst the hard-fought Democratic primary of that year, Obama led McCain by at least half a dozen points according to most polls. He ended up winning in November by a little over 7 points. The GOP had better hope that the trend will be different in 2012 (and it has plenty of reasons for this hope).

Thursday, February 9, 2012

Some new polling from the state of Pennsylvania suggests that Santorum is solidifying his support there and is now tied with Romney for the GOP race. Romney still outperforms Santorum by about 6 points in a possible head-to-head match-up against President Obama:

The statewide poll of 500 Republicans showed Santorum's support more than doubled from 14 percent six weeks ago to 30 percent, putting him in a statistical dead heat with former Massachusetts Gov. Mitt Romney, who increased his support to 29 percent from 18 percent. Santorum's gain was former House Speaker Newt Gingrich's loss, as his numbers here plunged from 35 percent to 13 percent....

Alone among the four Republican hopefuls, Romney was about even with Obama, with 45 percent to the president's 43 percent, in a head-to-head matchup in a poll of 800 Republicans and Democrats in Pennsylvania. Against Santorum, Obama was slightly ahead, 47 percent to 43 percent, among that group in the poll with a margin of error of plus or minus 3.46 percent.

Obama is polling below 50 in a state that has been a key Democratic hold. If Pennsylvania is in play, the president's reelection bid could face some significant difficulties. Pennsylvania last went Republican in 1988, when George HW Bush trounced Mike Dukakis.

Wednesday, February 8, 2012

Santorum's victories in Missouri, Minnesota, and Colorado provide a big boost for his campaign. Romney had lowered expectations for last night, but the size of his losses (and his loss itself and Colorado) were a blow to the campaign.

Newt Gingrich, however, may have been the biggest loser last night. Now, there is no incentive for Santorum to drop out, and Gingrich's claim to be the leading alternative to Romney is considerably weakened.

Tuesday, February 7, 2012

Charles Murray's new book on American inequality, Coming Apart, seems to have some interesting points (I haven't read it yet), but it is also generating some controversy.

David Frum has written an exceedingly biting commentary on Murray, suggesting that Murray's work does not do enough to address the cause of growing inequality and the stagnation of the middle class. He takes issue with the following passage from Murray:

In one respect, the labor market did indeed get worse for [working-class white] men: pay. Recall figure 2.1 at the beginning of the book, showing stagnant incomes for people below the 50th income percentile.** High-paying unionized jobs have become scarce and real wages for all kinds of blue-collar jobs have been stagnant or falling since the 1970s. But these trends don't explain why [working-class white] men in the 2000s worked fewer jobs, found it harder to get jobs than other Americans did, and more often dropped out of the labor market than they had in the 1960s. On the contrary: Insofar as men need to work to survive - an important proviso - falling hourly income does not discourage work.

Put yourself in the place of a [working-class white] man who is at the bottom of the labor market, qualified only for low-skill jobs. You may wish you could make as much as your grandfather made working on a General Motors assembly line in the 1970s. You may be depressed because you've been trying to find a job and failed. But if a job driving a delivery truck, or being a carpenter's helper, or working on a cleaning crew for an office building opens up, why would a bad labor market for blue-collar jobs keep you from taking it? As of 2009, a very bad year economically, the median hourly wage for drivers of delivery trucks was $13.84; for carpenter's helpers, $12.63; for building cleaners, $13.37. That means $505 to $554 for a forty-hour week, or $25,260 to $27,680 for a fifty-week year. Those are not great incomes, but they are enough to be able to live a decent existence - almost twice the poverty level even if you are married and your wife doesn't work. So why would you not work if a job opening landed in your lap? Why would you not work a full forty hours if the hours were available? Why not work more than forty hours?

Frum's response:

You are a white man aged 30 without a college degree. Your grandfather returned from World War II, got a cheap mortgage courtesy of the GI bill, married his sweetheart and went to work in a factory job that paid him something like $50,000 in today's money plus health benefits and pension. Your father started at that same factory in 1972. He was laid off in 1981, and has never had anything like as good a job ever since. He's working now at a big-box store, making $40,000 a year, and waiting for his Medicare to kick in.

Now look at you. Yes, unemployment is high right now. But if you keep pounding the pavements, you'll eventually find a job that pays $28,000 a year. That's not poverty! Yet you seem to waste a lot of time playing video games, watching porn, and sleeping in. You aren't married, and you don't go to church. I blame Frances Fox Piven.

How you can tell a story about the moral decay of the working class with the "work" part left out is hard to fathom.

A lack of opportunity and the hope of real advancement will in turn lower the incentive to work and to strive. Faith in advancement for a variety of sectors of the economy will reinforce popular support for the market economy.

Alec MacGillis offers some interesting points on the role deindustrialization has played in increasing inequality.

Government intervention can be justified on efficiency grounds if the free market won’t work well. For example, when competition in a market is limited, antitrust laws that prevent monopoly can be helpful.

A key argument for encouraging manufacturing is to create jobs and reduce unemployment. Unfortunately, those effects are probably small.

Unemployment today is high, but not because of a decline in manufacturing. That decline has been going on for 30 years — and for most of the 1990s and 2000s, the unemployment rate was less than 6 percent.

Today, we face a profound shortfall of demand. That truly is a terrible market failure, and it warrants government intervention. But we need actions that raise overall demand — like a tax cut for households so they have more take-home pay to spend, more aid to troubled state and local governments, and public investments in infrastructure.

This analysis is partial at best. It's true that manufacturing jobs alone will not turn around the nation's economic course. But these jobs have traditionally been higher paying, and the "profound shortfall of demand" that Romer laments has been fed by the decline of jobs for the middle class. By growing economic opportunities for the working and middle classes (which effective trade and manufacturing policies could do), we can inspire more demand and sustainable economic growth. Romer's solutions of tax cuts and federal aid to state governments would seem to act more as band-aids than long-term investments for the renewal of the American economy. Investments in infrastructure are a good longer-term measure, but they alone won't restore the economy.

On income distribution:

A final argument for supporting manufacturing is distributional. Manufacturing jobs are seen as one of the few sources of well-paying jobs for less-educated workers. Indeed, in the four decades after World War II, manufacturing jobs paid more than other jobs for given skills.

But that is much less true today. Increased international competition has forced American manufacturers to reduce costs. As a result, the pay premium for low-skilled workers in manufacturing is smaller than it once was.

Today, manufacturing wages are high largely because production is capital-intensive and technologically sophisticated. As a result, educational requirements have risen. Now, more than half of manufacturing workers have some college education, up from just over 20 percent in 1969.

There are sectors where workers with good educations could earn good wages if the economy were healthy. Why focus on manufacturing to create such jobs?

Romer's points about income distribution have a little more merit, but they still do not fully rebut the claim that manufacturing has traditionally offered more economic opportunity than many of the jobs in the "service" sector of the economy (many of which are now held by people with college degrees). And, again, factory worker incomes have fallen in part due to foreign competition that is heavily subsidized and supported by foreign governments.

And why focus on such jobs in the first place? One of the key reasons is that a productive manufacturing sector, rather than being a distraction from high-concept economic activity, actually plays a key role in the discovery of new innovations and new modes of economic growth.

Andy Grove, former CEO of Intel, has been hammering this point for a while: a vibrant manufacturing ecosystem benefits those attempting to create new things and solve old and new problems. Grove suggests that, if you want to catch the next wave of development, you need to have an in-depth knowledge of manufacturing:

A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up.

These manufacturing jobs play a crucial role in fostering new innovation and paths of economic growth.

There are plenty of reasons to be concerned about the decline of manufacturing. This decline is not fated: it has been spurred on by decisions made by many in the US policy elite. I'm not sure that manufacturing does need "special" treatment, but perhaps manufacturing could settle for effective treatment---which is much more than Romer's former boss has thus far provided.

Thursday, February 2, 2012

Zero Hedge includes a helpful link to the ten-year report issued by the CBO back in early 2001. Eleven years ago, the CBO predicted that the US would have an improving debt burden with consistent surpluses and relatively solid economic growth. The CBO got its projection on mandatory spending relatively right: it estimated that mandatory spending would be $1.9 trillion in 2011, when it ended up being $2 trillion.

However, this report was before the Bush tax-cuts passed, before 9/11 (and the resulting conflicts), and before a decade of economic disappointment. The CBO in 2001 projected an average real GDP growth of 3.1% a year during the decade after 2001; GDP growth did not even come close to that.

Wednesday, February 1, 2012

The recently released Congressional Budget Office report on the budget for the next ten years has what might at first seem like good news for the US fiscal order. It estimates that, by 2015, the national deficit would fall to under 2% of the GDP, often hovering around 1% until 2022 (when the CBO projections stop). If one subtracts net interest payments on the national debt (which the CBO estimates would increase considerably after 2014), the US federal government would often be running surpluses that would, by 2018, reach around 1% of the federal budget.

The current federal deficit runs at around 8.7% of GDP, so a decline to 1% of GDP would be a big improvement. Moreover, the size of the federal debt relative to the national economy would begin to decline around 2013, so the United States would, in many respects, be on a firmer fiscal footing. By 2022, the debt held by the public would be only 62% of the national GDP (compared to the projected 75.1% of GDP in 2013). That 62% figure would be higher than that of any year during the 1952-2009 period, but the trend is heading in a good direction.

However, there's some bad news: that CBO projection depends upon a number of assumptions, including improved economic growth, no "doc fixes" for Medicare, a decrease in defense spending, and the expiration of the Bush tax-cuts.

On growth, the CBO has little hope for the next few years: it projects that real GDP will grow 2% in 2012 and a mere 1.1% in 2013. It does hope for a considerable increase in growth in the years after 2013, however. It assumes that real GDP will grow an annual average of 4.1% in the 2014-2017 period, settling down to a 2.5% average rate of increase between 2018 and 2022. Those growth numbers are possible, but they assume a much stronger economy than the US has had since 2000. If the economy does not reach this rate, the deficits would likely be even worse. And if the economy turns around faster and maintains a stronger rate of growth after 2017, we could see the deficit shrink even more due to increased tax revenue and less spending on various income-stabilization measures.

The CBO baseline projection assumes that defense spending will fall from 4.7% of US GDP in 2012 to 3% of the GDP in 2022. Since World War II, defense spending has never been less than 3% of the GDP. It also assumes that nondefense discretionary spending will fall from 4.3% of GDP to 2.6% of GDP. Under this standard, discretionary spending would fall to the smallest proportion of the national economy seen in decades. Will that happen? If not, add some more to the deficit.

If payment rates for Medicare do not fall at the rate they are currently scheduled, the CBO estimates that over $300 billion would be added to the federal debt over the next ten years.

The CBO baseline assumes that revenues will climb considerably after 2012; they would jump from 16.3% of GDP in 2012 to 18.4% of GDP in 2013 to 20% of GDP in 2014. They would stay above 20% of GDP until 2022. Part of this increased revenue would come from an improved economy, but part of it would also come from higher taxes. The CBO projection assumes that the Bush/Obama tax-cuts will expire at the end of 2012 and that the Alternative Minimum Tax will not be indexed to inflation after 2011. Under this scenario, personal income taxes would climb from 7.4% of GDP in 2012 to 11.5% of GDP in 2022, a historic high.

Based on these projections, extending the Bush tax-cuts would add $2.8 trillion to the national debt over the next decade. Keeping those tax-cuts and indexing the AMT to inflation would add $4.5 trillion to the debt over the next decade. Those numbers do not include the increased interest payments such an increased debt would also cause.

If CBO assumptions about increased revenue due to tax increases and certain spending cuts are not met, the seemingly rosy scenario of a declining debt burden relative to GDP does not take place. Under an alternative scenario in which these non-economic assumptions are not realized, deficit spending remains an average of over 5% of the national GDP and the debt burden would increase; publicly held debt would rise to over 90% of GDP by 2022. The CBO suggests that decreased tax revenues due to tax-cuts would be primarily responsible for this increase: the deficit caused by extending current tax policy alone would equal almost 3% of US GDP during many years.

It's possible that extending current tax policies could lead to new growth unanticipated by the CBO, though it should be noted that Bush's and Obama's tax policies have led to slower growth that the CBO projects during the 2014-2017 period and slower growth than was seen during the Clinton and Reagan presidencies.

The CBO has some interesting information about entitlement spending. Social Security spending is currently 4.8% of the GDP, and it is estimated to climb to 5.5% of GDP by 2022; it will stay around 5% of GDP until 2019. Medicare is estimated to climb from 3.7% of GDP to 4.2% of GDP over the next decade, while Medicaid will climb from 1.8% to 2.5% of GDP. So Medicaid is estimated to be the fastest growing entitlement over the next ten years.

The assumptions made here by the CBO suggest a radically different federal government than we're used to, one that taxes more and one that spends more on various mandatory domestic programs and less on defense and discretionary programs.

Increased growth with an improved employment picture may be one way of keeping some discretionary and military spending while also not having a much heavier tax burden. Growth seen during the Reagan or Clinton (or Carter or Nixon or Johnson) years could spur enough increased revenue (combined with some tax reform) to allow the government to continue to meet its obligations and not indulge in radical deficit spending. Some entitlement reform (especially regarding medical spending) might help bend the curve of government expenditures down. The CBO assumes that domestic discretionary spending will decrease as a percentage of GDP, and a rigorous approach to cutting waste and appropriately focusing federal energies would help ensure that necessary and advantageous discretionary spending will be kept.

This CBO report suggests that the US fiscal situation is not necessarily at DEFCON 1, but it also implies that the stagnation of the past few years is untenable for the nation's long-term fiscal future. Growth and reform will be necessary components of fiscal sanity. As they gear up for the 2012 campaign, Republicans would be wise to attend to these crucial details.